If you want to watch an interesting movie the movie Unstoppable staring Denzel Washington is well worth watching. The day starts as any normal day starts and then someone does not follow the standard procedures (tries to cut a corner), makes an another error and can not correct the first error. Errors tend to compound themselves and soon a train has become a runaway. Originally because it rarely happens, the reaction is we have stop-gap measures and they will work, but what if most of them were not applied or the normal methods did not work. The music of the movie, plus the understanding by the long term workers save the day.

Linking to dividend paying stocks, it is not a big thing which tends to derail us, but little mistakes which should not have happened. We buy a stock but the market does not react the way we think it will and then what do you do. The stock has not moved or lost money so you hold. If you are average person, you wanted to make a capital gain so you wait. If you also bought for the dividends, you can wait while you receive an extra reward – dividends. The only time you have perfect information is when the event has happened, it is very hard to anticipate what the street will do – many people have the same or greater information than you do and many decisions with it. If you try to stay with profitable companies which pay dividends and those dividends are being increased every year by the end of the year your total return will beat the index funds.

There are more questions than answers, till the next time – to raising questions.

When you see a headline such as Dismal sales as provided by Siddharth Cavale of Reuters, you need to put the headline into perspective. The reality of the retail world is the last quarter is when the companies make their money. Thanksgiving and Christmas are the two biggest seasons in the retail world and after people really do not need new stuff until the spring. For those of us in the northeast, we better have boots and coats to keep warm outdoors. It was a dismal season because expectations were high that as the economy strengthened department stores would get a boost from a strong holiday shopping season.

The forecast from the National Retail Federation was 2016 sales would increase by 3.6% to $656 billion. However Amazon benefited from online shopping. It seemed people were spending at Apple’s App store which generated $ 3 billion. The most popular downloads were Super Mario Run and Pokémon Go (number one download) followed by Netflix, HBO Now and MLB.com.

The effect of the news of the sales decline on department stores stocks was a falling price.

Linking to dividend paying stocks, while many people have greatly benefited from department stores, it seems it general we are shopping less at them. The stores operate vast amounts of real estate and the market of prices has been decreased which means you are getting the goods for close to the buyer’s wholesale price. The retail world will continue to face great challenges. It is easier to buy utility companies and use the dividends to get the wonderful value the department stores will be offering.

There are more questions than answers, till the next time – to raising questions.

In the past, it was reasonably easy to distinguish between fake emails from the IRS and the Banks (if you have more than one account). However each year the scammers are getting better and you have to train yourself not to respond.

We live in an era where we expect and give fast response to customers and that is where the scammers have a gateway. Phishing emails have two purposes: one that clicks on a link to install malevolent software that locks your computer. You have to pay a fee (larger than you expect) to have it unlocked. The second purpose is to provide the log on and passwords to get into your accounts.

Rob Carrick writing in the Globe and Mail received some emails, the blogger received one to, the way to fight back is to know what the policies of the IRS and the bank are. If you receive an email to send an Interact payment, know the agency at tax time asks for check or direct deposit. The rules are similar the rest of the year.

If the bank sends you an email saying your banking activity, know the bank did not send it. Go to your bank. If there really is a problem, you have to go anyways.

Linking to dividend paying stocks, the fraudster preys on your honesty, most people are or try to be honest, however these types of fraud are lucrative and very hard to get your money back. Learn the policies and procedures of the banks and you will be better off. The same matter with investing, learn the rules and you will be better off.

There are more questions than answers, till the next time – to raising questions.

 

 

 

What is your outlook for interest rates? if they go higher how much? do you think the economy has improved for the fed to increase it? If you are not a believer that the fed will raise interest rates over 2% then utilities stocks still have value in owning. Gordon Pape examined Southern Company.

Southern Company is based in Atlanta and is the second largest energy utility in the US. It serves 9 million electric and gas customers through 4 states, natural gas distribution in 7 states and is a provider of fibre optics and wireless communication. It typically trades between 46 and 54 and is trading around 49 with a price to earnings ratio of 18, while the S&P 500 as a comparison is 25.

In the third quarter operating revenue was $6.3 billion compared to $5.4 billion the year before at the same time the company had 3rd quarter earnings of $1.1 billion compared with $1 billion in 2015.

The dividend is $2.24 a year to yield 4.6%  and since 2000 the company has increased its payout every year.

Linking to dividend paying stocks, utility stocks generally will not increase your capital gain, but they will and can provide a safe secure dividend which means if you buy the company when the stock is depressed, you gain a better yield than at the bank. Over time, the dividends and the company share will tend to increase and you will have followed the rule do not lose money in investing.

There are more questions than answers, till the next time – to raising questions.

 

At the end of the possibility curve that is a section for the unknown and it is called the Black Swan. Jake Lloyd-Smith writing for Bloomberg News outlined some of the concerns Barclay’s Bank have concerning commodity prices. Last year commodity prices increased and that was a good thing for investors. What could go wrong or why would prices decrease this year? According to a report written by Michael Cohen and Dane Davis many things:

China, Russia, the Middle East and Turkey can easily have an effect.

Venezuela might default on its bank loans

Commodities must move from one country to another which there is always a concern about supply routes

Relationships between countries particularly when President Trump says or tweets something.  (while blaming Ms. Clinton for the situation in the Middle East, asked what he would have done -he said he would have left enough troops to secure the oil fields. Considering we are in the 21st century and that talk – to the victors, the riches are taken is a few centuries old not sure what will come from the White House)

Trade wars between China and the US; the US and Mexico;

Campaign rhetoric from elections coming true.

Linking to dividend paying stocks, somewhere along the lines there will be significant change in the normal economic patterns. Who will change is what we will find out in the future. Some of the events will radiate from the White House for no one is quite certain what the priorities of the new administration are and how the White House sees their role in the world. Ideally, if you own companies that have near monopoly conditions, you can rest easier until the White House begins to sort itself out and predictions on how it will govern come easier.

There are more questions than answers, till the next time – to raising questions.

 

Over the Holidays you may have received a book as a gift, it is likely Warren Buffet did. Mr. Buffett is a reader of newspapers, magazines and books for he does his own research, has a prodigious memory and loves reading. In an article written by Brian Milner titled Reading one’s way to Buffett-sized earnings, Mr. Milner notes high net worth people tend to read far more than the average investor. So what books does Mr. Buffett recommend for investing?

Favorite book: Benjamin Graham’s The Intelligent Investor

Mr. Graham preached that investors should think more like owners than traders when evaluating a company and its prospects. make sure the price includes a margin of safety, avoid trying to time the market and never sell when the herd stampedes for the exists. Mr. Buffett says pay attention to Chapters 8 and 20 which has been the bedrock of his investing activities for more than 60 years.

Other books on his list to read and reread
Security Analysis by David Dodd and Benjamin Graham

The Clash of Cultures by Jack Bogle  (he founded Vangard  – the company who specializes in index investing)

The Little Book of Common Sense Investing by Jack Bogle

Common Stocks and Uncommon Profits by Philip Fisher (the father of Ken Fisher who writes in Forbes – the Fisher Report and runs a fund)

Stress Test by Timothy Geithner (former US Treasury secretary)

The Outsider’s 8 Unconventional CEO by William Thorndike

Linking to dividend paying stocks, all these books outline an approach to take to the market that seasoned people have found fruitful. All of the approaches take time and the idea is to buy companies which are undervalued and become fully valued and continue to do their good things for a long time to come. There are always opportunities and whether you do it through indexing or individual stocks, if you narrow the bulk of your investing to companies that make profits and pay a dividend in the long run you will have more wealth.

There are more questions than answers, till the next time – to raising questions.

 

In the investment world, people with all types of backgrounds look at stock prices and do their analysis to come up with a decision. With some stocks it is relatively easy for people to agree with the general view, however there are some where there are competing points of view and you are left to make a decision is the glass half full and which way is it tilting. Robert Gill of Lincluden Investment Management recently wrote about a stock called Home Capital which is Canada’s largest non-prime mortgage lender. In December of 2016  30% of the float of shares was short or equally informed people were making decisions the company’s shares were going to go down sooner than later. Mr. Gill believes the shares will go up.

The shorts have good reasons and their reasoning are 1) the Canadian market resembles the US market in 2008 and therefore should do the same thing. 2) the firm had problems with mortgage brokers making stuff up. 3) the company specializes in making loans to people deemed too risky by Canadian banks – entrepreneurs and new citizens.

Mr. Gill asks are those valid concerns: 1) the Canadian market is much smaller than the US market (think California), which makes it more influenced by local drivers. In addition the Canadian employment levels remains solid and low interest rates reflective of the US fed remain. Home Capital has 85% of its mortgages in Ontario and bulk of those in the greater Toronto area. While it is true some brokers gave misleading information, Home Capital did an audit cut its ties with these brokers however the loans have remain solid with a loan loss ratio of 0.3%which is better than Canadian banks of 0.75%. The reason tends to be the short term nature of the mortgages.

Mr. Gill then analyzing the company – over the past 10 years the return on equity (ROE) has been 25%, over the past 5 years 23% and most recent ROE was 18.6%.

The mortgage market in Canada is worth $1.2 trillion which the big 6 banks control 65% to 75% or there is $400 million to fight over and Home Capital has 4.1% market share there is room to grow.

Home Capital pays a dividend that management was increased regularly over the past decade at present the yield is 3.4% and management has bought shares.

The shares trade at 1.2 times price to book and 7.5 times earnings which compares to 2.0 times and 23% respectively for the broader market. If the shorts begin to unload their position the price could go higher.

Linking to dividend paying stocks, for every active stock there are equally smart people deciding to buy and sell. They buy and sell for many reasons and for their reasons they made a good decision. As you look to buy you are always wondering why is the glass half full and why does not the other side see the same thing? Only time will tell what is the correct answer and that is the reason the only perfect answer is the one seen from the past. We do not know the future but can make educated predictions.

There are more questions than answers, till the next time – to raising questions.

In North America we were reasonably lucky for the great banking crisis of 2008 was essentially over by 2010 and with the new rules came in the banking system has been stable. The economy has been growing and we are basically with the same institutions as prior to 2008. In Europe, the world is much different, the banking system moves from one crisis to another and the reality is the ultimate solution is the senior government with access to lots of credit. Many private sector banks were largely nationalized but slowly have come to be reprivatized. Writing for Reuters Silvia Aloisi, Paola Arosio and Pamela Barbaglia wrote about How JPMorgan was unable to save Monte dei Paschi.

In Italy, the third largest bank is called Monte die Paschi di Siena. Similar to the largest banks given the slow recovery of the economy and the billions in bad debts, the bank needed greater capitalization. The board decided to try a private sector solution lead by JPMorgan, the advantage for JPMorgan was the lead in the fees in the range of E558 million. The idea was to raise write off the bad debts of $40 billion and raise E5 billion in equity. This was promoted as a private sector arrangement for the general public were skeptical of more government arrangements (although needed it has not worked as well as it expected). The fact that state aid has not changed the economy has allowed the critics to suggest one more round of Euro funding was not going to change much. If a government takes Euro Bank financing, it takes their rules.

With all banking financing, the ultimate decision rest in the President or Prime Minister office, in Italy Prime Minister Matteo Renzi who has a political base of support around Siena was in full backing of JPMorgan and other banks going forth with their solution. For the bank, if this one was successful, more of these types of deals would be coming in the future. JPMorgan called on investors throughout the world, however although government guarantees were not part of the program, the support of the Prime Minister was touted and when he resigned over another issue, fewer people were willing to sign on to buying the debt and equity which lead to the deal falling apart.

Since the deal fell apart, the board went to the European Central Bank (ECB) which has decided the capital shortfall is not E5 billion but E8.8 billion. The government of Italy or ECB has to put money into the bank to save it. More subordinated bondholders will be forced into owning shares of the company or a debt for equity solution. The bank will be saved, but not before the government owns 70% of the bank.

Linking to dividend paying stocks, while banks that need bailouts do not pay dividends, when they come out of restructuring and begin to generate profits can be an excellent investment, at least it was in the US banking world. The US banks were restructured, paid back the US government and helped ensure the US economy can grow.

There are more questions than answers, till the next time – to raising questions.

 

For many companies, at some point in the year they are looking for more growth to be bigger in an effort to control market prices to stabilize their incomes. In 2016 Michael De La Merced writing in the New York Times examined the mergers file. In 2016 deals for $3.55 trillion were announced but 1009 takeovers worth $800 billion were pulled which still accounts for some big mergers during the year. In examining the deals that did not go through, most were about trying to achieve growth of their companies which the company could not generate on its own. The problem was both government regulations (some said no due to antitrust or possible market concentration) and others thought the price should be higher. Some of the bigger deals which did not come to pass include:

Pfizer and Allergan – deal was worth $152 billion and part of the reason was to change its corporate tax home to lower the tax bill. The government changed the rules which did not make changing locations for the tax an advantage and eventually Pfizer walked away.

Honeywell and United Technologies  – deal was worth $90 billion and composed of stock and cash. United Technologies stock price decline and there were disagreements who would be the senior people in the new company. The issue of antitrust was raised but by that time the deal was dead.

Energy Transfer Equity and Williams Co. – deal was worth $ 33 billion. The smaller Energy Transfer wanted to create an energy giant, but oil prices fell and the deal seemed expensive thus Energy Transfer wanted to walk away. Williams fought it in court however Energy Transfer won and walked away.

Halliburton and Baker Hughes – deal was worth $35 billion. The idea was to combine the two companies to fight the number one company and along the way cut costs. The government had other ideas as antitrust was raised, when the oil price dropped the deal fell through.

Mondelez International and Hershey – deal was worth $23 billion. The owner of Cadbury and Nabisco wanted to buy Hershey chocolate. Hershey wanted a higher price and there is a problem with the ownership of Hershey. It is owned by a trust for the benefit of orphans and the question is how can that be changed?

Linking to dividend paying stocks, mergers will continue in 2017 and beyond some will be succeed some will not. On the face of it, there maybe less antitrust concerns from the new administration and it will be tested in the not too distance future. If there is less antitrust concerns expected even bigger activity in the mergers field. The other aspects who which company executives get senior posts and fair value will also continue.

There are more questions than answers, till the next time – to raising questions.